Category Archives: Economics

Miscellaneous economy stuff

Economy and Integrity

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The PRC is demonstrating the relationship between integrity and a centrally managed economy.

When China let Dongbei Special Steel Group default on a bond payment this spring, it was supposed to mark a new determination to allow long-coddled state industries to suffer the consequences of their bad decisions.

Three months later, the result has been…nothing. The ailing steel mill has missed five more payments on its $6 billion in debt, but has yet to formally file for the equivalent of bankruptcy protection, close unproductive units, or start a restructuring of its operations.

Nothing has happened here because the PRC has chosen to let short-term concerns about employment and what the government’s ruling Communist Party of China defines as “growth” to take precedence over concerns about integrity, contractual commitments, and actually paying creditors what’s owed them.  Which destroys anything that might flow from the short-term into long-term growth and prosperity.  This is all so that Xi Jinping and his CPC cronies can look good for the near term.

These business decisions not to pay, coupled with the government’s decisions not to allow market consequences and to not apply government sanctions for such unilateral contract abrogations, give a clear indication of the level of integrity extant in this particular centrally managed economy.

The reputation that results from such systemic lack of integrity, too, can only make it harder for any funding source to lend any more money, and it can only drive up the cost of such loans and borrowings as may still occur.  Such costs must rise in order to account for the high likelihood of continued consequence-free reneging defaulting on debt agreements.  After all, “default” in this kind of environment is a misnomer.  Refusal to pay is less a default than it is a playing of the lender for a sucker.

Need More Regulation

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That’s the meme of Federal Reserve Board Governor Daniel Turillo, the Fed’s reputed point man for regulation.  Turillo is claiming that

the lessons of the 2008 financial crisis won’t be complete without better regulation of short-term funding both inside and outside the banking system.

Naturally, the regulatory point man is going to see everything as a regulatory need.

OK, since more regulations are the solution, here’s a suggestion.

How about some regulations prohibiting the Federal government and the Federal Reserve Bank from using credit and lending as social engineering tools?

That’s Our Client State

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Leave them alone.  That’s the People’s Republic of China’s reaction to the US/Republic of Korea agreement to station an anti-missile defense system in the RoK, a setup explicitly designed for defense and deployed in response to northern Korea’s missile and nuclear warhead buildup.

PRC’s Foreign Ministry spokesman Lu Kang:

We demand the US and South Korea change their attitude.  By agreeing with the US side to deploy this system, South Korea has gotten itself involved in a situation that damages the current balance on the peninsula.

Yeah—the balance the PRC and their client were trying to develop, from which the better to intimidate the RoK and other regional nations.  Because defensive systems are threats, but PRC/northern Korea offensive systems cannot be.

Lu also refused to rule out economic retaliatory measures against the impertinent RoK.  Roughly 25% of the RoK’s exports go to the PRC.  This comes, also, with the PRC’s history of economic retaliation, as it did against Japan when the Japanese successfully disputed the PRC’s attempt to seize Japan’s Senkaku Island group.

Another IRS Assault

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This time on private enterprise and a private economy company that’s nominally outside the scope of the government economy.

US tax officials sued Facebook Inc to force the company to hand over documents related a transfer of assets to Ireland in 2010, part of a yearslong investigation into whether some of those assets were undervalued “by billions of dollars.”

Because, of course, John Koskinen and his IRS minions know better how to value a private enterprise than does the private enterprise.

Alternatively, Koskinen has reason to believe the company has falsified its valuations, which raises the question: what’s your probable cause, Mr Koskinen?

Italy, EU, and Bank Bailouts

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In a Wall Street Journal piece about Italy’s banks in general, are these two items that illustrate both the Nanny State nature of Italy and the cultural differences in attitudes toward personal responsibility among the various constituent nations of the EU.  The backdrop includes the EU’s rule, enacted in 2014, that requires banks across the EU that face bankruptcy to have the banks’ stakeholders (as the WSJ calls them)—shareholders, bond holders, and depositors (but only some of those last…)—to take the losses first and foremost.  The backdrop also includes the trouble Italy’s banks, in particular, are in:

17% of banks’ loans are sour. That is nearly 10 times the level in the US, where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.

What to do, then?

The Italian government has sought EU permission to inject €40 billion [$52 billion] into its banks to stabilize the system.
…
Rome argues that bending this rule would be a small price to pay for erecting a firewall against possible bank contagion stemming from Brexit.

Because those responsible for a bank’s business strait shouldn’t have to bear the burden—taxpayers should have to pony up, too.

Rome has criticized the EU’s new banking regime and doesn’t want to use “bail-in” rules that prescribe the order in which stakeholders must bear losses for winding down an ailing bank, in part because of the peculiarities of the Italian banking system. About €187 billion of bank bonds are in the hands of retail investors, whose holdings would be wiped out by a bank resolution under the new rules.

Because personal responsibility—on the part of everyone in the society—should be waivable at convenience.

Other nations of the EU—Germany, for instance—demur from this exception-making and from this walking-away from responsibility of those involved.  Germany’s Chancellor Angela Merkel, referring to that 2014 rule:

We worked to set down certain rules about bank resolution and bank recapitalization. We can’t do everything again every two years.

Stick to the rules and hold those stakeholders responsible—as they are—in other words.

Add to this, the Italian government’s direct responsibility for a failing system of handling bankruptcy:

One reason for the low valuations [of bad loans] is the enormous difficulty in unwinding a bad loan in Italy. Italy’s sclerotic courts take eight years, on average, to clear insolvency procedures. A quarter of cases take 12 years.

This sort of basic difference on the nature of responsibility is a major part of why the EU as its comported will fail, and it’s the sort of thing that underlies Great Britain’s citizens’ decision to Leave.